Grow Your Dividend Portfolio with DRIP Investing

There are plenty of fancy words and acronyms thrown around in the investing world. And this can be confusing to folks that are just starting out with investing, as well as for those folks that have been investing for some time. But we are here to set the record straight on DRIPs and DRIP investing.

In the end, we want you to be comfortable with your DRIP strategy investment plan as a way to build real wealth. As you look more deeply into this subject you will find that all dividend paying companies can be DRIP investing companies for your dividend paying portfolio.

DRIP investing is a perfect way for long term investors of dividend paying companies, to build great wealth.

What is a DRIP?

DRIP is an abbreviation for a dividend reinvestment plan.

Any dividend paying stock can be eligible for a dividend reinvestment plan. It requires you, the shareholder, to elect to have any cash dividends paid to you to be automatically invested in more of the company stock at the then market price.

As a simple example if you received $100 is a cash dividend for ABC Company and the company stock was trading at $50 a share, your $100 dividend would be automatically converted to 2 additional shares of stock.

The Advantages of a DRIP

1. When you buy stock directly from SOME companies (not through a brokerage firm) and you reinvest the dividends you get a discount on the purchase price of reinvested dividends.

As an example, Essential Utilities, Inc. (formerly Aqua America), ticker symbol WTRG, offers a 5% discount on the stock price for any reinvested dividends.

• Not all brokerage firms allow investors to buy fractional shares when they purchase stocks. However, through DRIP investing, any dividends are going to be converted to fractional shares of stock, allowing you to build equity positions slowly over time with partial shares.

• A DRIP strategy investment in stocks can be done at no cost. Many brokerages offer commission free trades in stock, but not all of them. A DRIP investing strategy is done with zero commissions regardless of whether you are buying directly from the company or reinvesting via a brokerage firm.

• DRIP investing is automated, so you don’t need to keep checking your account and making a bunch of trades. Very little effort is needed once the DRIP plan is set up.

• DRIP investing allows you to dollar cost average with your investments. Dollar cost averaging is the idea of buying the amount of stock that you want in the company in small increments over time such that your average cost basis is the average cost over that time frame. This avoids the risk of buying shares all at once at a time when the stock is highly priced.

The Disadvantages of a DRIP

1. If you want to be a DRIP investor, one thing to realize is that you are converting the dividend received to stock automatically. That means you will need to pay the state and federal taxes on your dividend income with cash from other sources.

Depending on the amount of taxes involved, that may be easy or quite a burden. But it is something to be aware of when DRIP investing.

• The convenience of DRIP investing is described in #4 above, but with that automation come the removal of any discretion about buying more stock with the dividends received.

The automation removes you from saying the stock price is too high now and I should buy at a later time. As long as the benefits of the automation outweigh the negatives, then a DRIP strategy investment is right for you.

How to Enroll in a DRIP Investing Plan

There are two ways to enroll in a dividend reinvestment plan. One is directly with the company and one is through a brokerage firm like Merrill Edge.

For a stock like Essential Utilities, Inc. mentioned above that you want to buy directly from the company you would simply go online to their website or call their investor relations department to get more information on how to sign up.

Or most brokerages allow you to reinvest your dividends into more shares of company stock once you purchase the initial shares. Exactly how you indicate which company dividends you want reinvested varies by brokerage house. Your best option is to type in “dividend reinvestment settings” into the search bar of your brokerage website and follow the instructions from there on how to indicate you want your dividends reinvested when received each time the money hits your account.

DRIP Investing: Companies to Consider for your DRIP Stock List

Any company paying a dividend is eligible to participate in your dividend reinvestment plan.

Everyone’s investing needs are different so you should not invest in any of the following companies without doing your own due diligence.

What follows are examples of high quality dividend paying companies you should consider as DRIP investing companies for your investing portfolio.

Abbvie (ABBV): Well-run pharmaceutical company, 5% yield trading at less than 10 times earnings, with a dividend payout of less than 50%.

Altria (MO): The classic sin stock, selling tobacco products. Yield of 8%+, was just raised by 2.4%.

Bristol Meyers (BMY):  Also a well-run pharmaceutical company trading at less than ten times earnings, yielding 3.1% and a low payout ratio of approximately 30%.

Dominion Resources (D): A well respected retail utility, 3.2% yield, with a payout ratio of approximately 70%.

Enterprise Product Partners Limited Partnership (EPD): A well covered 10% yield with lots of insider ownership. One of the few oil and gas stocks I would invest in trading at very depressed prices for such a stable business.

Pepsi (PEP): An iconic brand for a consumer staple. Very strong and stable cash flow. Payout ratio of 75% with a safe 3% yield.

Realty Income Corporation (O): A real estate investment trust yielding 4.7% that is a titan of real estate investing.

ATT (T): Another fantastic brand buoyed by strong growth in their cellular network. A 65% payout ratio and a 7% yield. Significant debt on the balance sheet but being paid down quickly.

Sum them all up and you’ve got the beginnings of a DRIP stock portfolio that yields 5.5%. That is a good start to achieving a 10% annual return, with the other 4.5% coming from stock appreciation as the companies grow their earnings and cash flows.

In Summary

DRIP investing with stocks is an easy and convenient way to invest with dividend stocks.

Select some high-quality dividend paying stocks, elect to reinvest the dividend when they are paid in more shares of stock and then sit back and watch your wealth grow.